Thursday, March 22, 2007

The Steady Fed

One of the main learning objectives in Economics 2 online is to understand the impact the Federal Reserve System and monetary policy. (Chapter 12 in the Colander text, Chapter 13 in Krugman and Wells)

Yesterday, March 20 2007, The Federal Reserve decided to keep the all important federal funds rate steady at 5.25%. This lack of action was widely expected. The Fed has not changed rates for six straight meetings.

According to Bloomberg, which is an excellent source of economics news: “For the first time since the Fed ended a two-year run of interest-rate increases in August, the central bank yesterday signaled that its next move might be either to lower or raise borrowing costs, instead of just the latter. The Federal Open Market Committee's statement omitted a previous reference to ``additional firming'' in favor of the more general ``future policy adjustments.''

The shift indicates officials may have concluded the risks of a deeper recession in the housing market make it hard to raise rates to bring down inflation more quickly.”
Here is the full text of the Fed’s statement about the state of the economy:

“The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-3/4 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. “

The stock market moved higher after the release.

Extra Credit: How many regularly scheduled open market meetings does the Federal Reserve Open Market Committee hold each year? When is the next meeting? If you are the first student to send me an e-mail ( with the answers, you will be rewarded with two extra credit Discussion Board points. Only one blog extra credit question per student can be answered in any given week for Discussion Board extra credit.

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